How to Build Systems

“Achievement comes to someone when he is able to do great things for himself. Success comes when he empowers followers to do great things with him. Significance comes when he developed leaders to do great things for him, but legacy is created only when a person puts his organization into the position to do great things without him.” – John C. Maxwell

What are systems? A system is a set of processes that can run without you. As your business grows, you’ll need to build systems and processes that can be automated as much as possible. You’ll need to build distribution systems, inventory systems, marketing systems, customer support systems, research and development systems, accounting and hiring systems, and many others.

Systems are rules, policies, and procedures that trained individuals can repeat as your company grows and run independent of you.

Let’s look at some additional examples of systems that will be built in an entrepreneurial venture.

You’ll need to build systems for performance reviews. You’ll need systems for simple things like getting food during the day to feed your employees if needed. You need systems to train your new people; to notify customers when your product is not working; to review the operations of your business; to gain and collect feedback on your product; to do expense planning and financial planning and pay for purchases; to pay salaries through payroll; to determine how happy your customers are; to implement a net promoter score for your customers; to handle vacation requests for your employees; to test your marketing using the scientific methodology that we talked about in the previous chapter; to manage requests for proposals (RFPs); and so on. You’ll need systems for setting up your hardware; for providing tax documentation, legal contracts, and full 360 feedback to your employees; for communicating internally and externally. These are just a few examples of the hundreds or thousands of systems that will be running in complex, large organizations.

In the entrepreneurial phase, try to be light on formal systems (aka bureaucracy). You just need to have the minimal necessary amount of efficient systems that run smoothly. As you grow, you can put in place more complex processes.

During your first year in business, your success is really about what you personally do and the product you build. After the first year in business, your success is determined more by the people you hire than by you. After the first year, or even the first few months, stop trying to do everything. Hire smart people and help them put systems in place so that things happen even when you’re not there. Let’s look at a few key systems that you should think about creating in the early stages of your business.

Setting Up An Accounting System

Make sure you hire a bookkeeper to keep track of and categorize your revenues and expenses (and if you can’t afford one, learn how to do it yourself). Have them send you a monthly income statement, balance sheet, and cash flow statement. Learn how to read a financial statement if you don’t know how. It’s up to you if you want to see you statements in a cash basis or accrual basis.

Most common accounting packages like QuickBooks and Peachtree or (or online accounting tools like Xero, Kashoo, or Legerble) can produce both cash basis and accrual basis reports. You will need an accounting system set up to be able to raise investment later.

Outsourcing Payroll

Unless you’re purposely masochistic, there’s just no reason to attempt to do your payroll yourself. Hire a firm like Paychex, ADP, or Intuit Online Payroll to do it for you. They’ll take care of all the tax withholdings, calculations, and government compliance. ADP and Paychex can also set up a 401(k) program for your company.

Putting in Place an Employee Handbook

Creating a single digital or printed manual that employees can refer to when they have questions about things like stock option plans, paid time off policies, and health benefits can be really helpful and save you and your fledgling HR department a lot of time. Try to document all the key policies and procedures you have and publish them annually in an Employee Handbook. Our employee handbook today contains the following sections:

Acceptable Use Policy

Attendance Policy

Badges Policy

Benefits Policy

Blogging Guidelines

Change of Information Policy

Community Giving Policy

Confidentiality Policy

Disability Leave

Dress Code Policy

Drug Policy

Ethics Policy

Employee Referral Policy

Family Medical Leave Policy

Food Policy

Freelancing Policy

Harassment/Professional Conduct Policy

Holidays Policy

Inclement Weather Policy

Internal Transfer Policy

Medical Leave

Paternity Leave
Maternity Leave

New Hire Forms Procedure

Paid Time Off (PTO) Policy

Payroll Procedure

Performance Evaluations

Phone Usage Policy

Printing Policy

Reimbursement/Purchase Requisition Procedure

Short Term Leave Policy

Supplier Policy

Travel & Entertainment Policy

Workers’ Compensation Policy

Creating an Efficient Meeting Rhythm

Too often, people put systems in place that end up causing far too much time to be spent in meetings. One thing I’d encourage you to do as an entrepreneur is to adopt what’s called a “maker schedule.” Paul Graham once wrote a very influential article on the difference between maker schedules and manager schedules.

A manager schedule is one that goes from meeting to meeting to meeting (maybe six, seven, eight, or nine meetings per day). You may have experienced that yourself. A maker schedule, however, is generally better for someone who is designing or developing things. For someone who is an engineer or designer, a creative person or someone working on hard problems, often the minimum amount of time the brain needs to be able to truly focus on solving a difficult problem is a block of about four hours. So if you can’t provide an uninterrupted block of four hours to your employees during their day, they might get very little done.

At Connect, we have one meeting that lasts about 25 minutes in the middle of the day, where everyone goes around and shares their accomplishments from the prior day and what they will be working on the next day. Before that meeting, we’ll have about a 3.5-4.5 hour work block and after that meeting, we’ll have another 3.5-4.5 hour work block. It ends up being a very productive day that has two “maker blocks” within it.

We find that to be much more effective than having 6-8 meetings a day where you’re constantly pulling the most creative innovators in your organization out of their focus zone—out of their state of “flow,” as Mihaly Csikszentmihalyi says.

At iContact, one of the things we implemented with our executive team was that at 9:46 every morning, which was a very specific time so everyone would be on time every day, we would have a daily standup meeting where we took 10 minutes and went around our 7-person executive team and just shared what we were doing that day.

Once a week, we reviewed the company’s weekly results (sales, trials, conversions), tracked progress against each of our quarterly priorities, and reviewed the status of each of our company-wide projects. We eventually came up with Key Performance Indicators and quantitative measures of success and started marking each KPI as red, yellow, green, or supergreen based on how we were performing. We were as objective as possible about results, and did our best to leave subjectivity out of the assessments. By making it clear in advance which metrics individuals were responsible for and would be compensated on, we had an easier time assessing performance later.

We would also hold a company-wide offsite every six months called iContact Day at which we talked about strategy and the future of the business.

At 300 employees, we had a more complex meeting rhythm that consisted of a weekly Senior Leadership Team (SLT) Meeting, a weekly Operating Committee Meeting, monthly company-wide meetings, quarterly company-wide kickoffs, and quarterly SLT offsites on team health, operations, and strategy.

By this stage, our weekly meeting consisted of the eight-member Senior Leadership Team (CEO, CTO, CFO, CMO, SVP Sales, SVP Support, SVP HR) and another eight members of what we call the Operating Committee. At this weekly meeting we did three things:

Quarterly Priorities Review: Have the Operating Committee owner of each quarterly priority report on its progress

Announcements and Open Agenda Items: Anyone can bring anything up for discussion

At different companies, you’ll need to innovate and have different meeting systems and processes within the organization. The key is to think about things consciously—things like meetings, processes, and accounting—so that you end up creating systems that are effective, efficient, and enable you to build a business that eventually operates even without you.

Installing a CRM System

By the time you get to six employees, it’s time to install a basic tool for keeping track of your customers and contacts. At iContact we used Salesforce.com for our CRM tool as well as our Sales Force Automation (SFA) tool. Other options include Nimble, Zoho CRM, Highrise, SugarCRM, and Batchbook. You can also use your email marketing tool as a basic CRM system.

Regardless of what you use, your customer list and prospect list is gold. Make sure you are collecting information on who your customers are—whether they purchase through the web, by catalog, or at a store. To grow your business, you need to be able to get in touch with your existing customers and find out how to convince them to spend money with your business.

Putting in Place Real Time Dashboards

One of the most valuable things we ever did at iContact was put in place real time, visible dashboards. You can use tools like GeckoBoard or KissMetrics, or more complex tools like Salesforce.com. Here are the main dashboards we had at iContact:

CEO Graphs Dashboard (built within Salesforce.com)

CEO Data Dashboard (custom built)

Mail Sending Dashboard

Call Center Dashboard

Within our Salesforce.com CRM tool we had over 30 dashboards, ranging from marketing dashboards to a dashboard tracking our volunteering activities through a tool called VolunteerForce.

At the very least, you should have a dashboard that is displayed on a flat screen TV somewhere in your office that shows basic information like how many customers you have, your monthly sales, and how many new customers you added that month. If you don’t know how many customers you have and how many customers you added per month to date, you should start tracking this most basic data. Even in a brick-and-mortar business like a florist shop or a restaurant, you should know how many new and repeat customers you get in a month.

When iContact acquired the event marketing tool Ettend.com in April 2010 from entrepreneur Rick Reich, the first thing I asked Rick to do after the transaction was put in place an improved dashboard that could show me at a glance how the business was performing.

I’ve found there to be a correlation between companies that have real-time or near real-time visible metrics displayed in their office and companies that are wildly successful and reach lists like INC 500 and can raise outside investment capital.

While your company is small, set up your system of dashboards now so that you can manage the business effectively as you grow.

Here is a summary Gantt chart for the common activities you’ll need to pursue in your second year in business or when you have between two and five team members.

Creating a Performance Review Process

As your organization grows, you’ll eventually hire a full-time Director of HR and install what’s called a Human Resources Information Systems (also known as a Human Resources Management System) that manages all aspects of HR including:

Payroll

Talent Management

Recruiting

Performance Reviews

Total Rewards/Compensation

Services that perform these tasks range from outsourced payroll providers like Paychex and ADP to web-based tools like SuccessFactors and Taleo. SAP, Oracle, Workday, and PeopleSoft also have HRIS solutions for larger companies.

Eventually, you should implement a 360-degree performance review form. This form can be used for managers to get feedback from their peers and their staff members.

For now, you just need a basic performance review process in place. This can start with an Excel Spreadsheet or Microsoft Word document.

Here’s the original performance review template we used at iContact. We later moved on to an automated online solution, but a Word document can work just fine until you have 100+ employees, in my opinion.

Here’s the original performance review template we used at iContact. We later moved on to an automated online solution, but a Word document can work just fine until you have 100+ employees, in my opinion.

Original iContact Performance Review Template

Team Member Being Reviewed: __________ Review Period: ________

Supervisor Name: _________ Position of Team Member: __________________

Part One: Open Response

Please respond to each of the below questions to the best of your ability.

Generally, how do you feel the team member has performed in their job over the past year?

What specifically do you view to be the strengths of this individual?

Can you provide an example when you feel the team member did an especially good job in the past six months?

What specifically do you view to be the items that the individual should work on in the next six months?

Part Two: Ranking Questions

Alignment with Values, 1-5 scale

Wow the Customer

Operate With Urgency

Without Mediocrity

Make a Positive Wake

Engage As An Owner

Please rank the team member on the following items on a scale of 1-5.

Overall Results

Accountability

Delivering on commitments

Hitting deadlines

Working diligently

Working efficiently

Punctuality

Listening Ability

Receiving Feedback

Quality/Detail Attention

Expression of Ideas

Contribution to a common effort

Cooperation with the team

Fulfilling job responsibilities

Advocacy for Customer

Creating a Compensation System

Setting Up a 401(k) and Health Care Plan

As you get past a handful of team members and your sales volume can support additional investments in your team, consider setting up a 401(k) retirement program and beginning to provide health coverage to your employees. You can often use your payroll provider to set up a 401(k) program. To encourage employees to save, when you can afford to you may wish to match a percentage of employee contributions. iContact matched 25% of all employee contributions to their 401(k) plans for the first 4% of salary contributed.

To set up a health care plan, go online and find a couple health care providers in your state. As you consider which plan and provider to select for your company, take into consideration the major components of each plan outside of cost:

The major components of a health care plan include:

The deductible

The co-pay

The cost of generic and brand name prescriptions

The network coverage

In the United States, there are three general types of health care plans. A PPO plan is generally considered more employee-friendly than an HMO or HSA plan but has the highest costs. Here’s a summary of the three types of health care plans:

PPO (Preferred Provider Organization) – Uses a large network of health providers that your employees can access. PPOs usually provide the most network coverage to the employee.

HSA (Health Savings Account) – Enables employees to create a savings account that they can draw from tax free to cover high deductible health care plans. The company can contribute to the savings account in addition to the employee.

Creating an Incentive Compensation System

There are many reasons why people are motivated to work—for money, to be part of a team on a common mission, to feel challenged, to make a positive difference, and to have their talents appreciated. Getting your non-monetary compensation system right is just as important as getting your monetary compensation system right.

Compensation has a few different components to it, including base salary, incentive compensation (also known as bonus compensation), the ability to participate in the upside of a company via stock options or restricted stock units, and your benefits package.

For the first few employees, you will likely have to use every ounce of your persuasive abilities to convince great people to work for you for free or next to nothing. In the beginning, you pay what you can in cash or deferred salary and the rest in an ownership stake in your business.

Once you get to a multi-layered company in which everyone no longer reports to you (this tends to happen around the 5-8 employees mark), it becomes important to define in writing how your employees will be compensated.

The base salary component is generally established at the time of hiring and adjusted annually or at the time of promotions.

Incentive compensation is known by various names, including incentive comp, performance-based pay, variable pay, and bonus.

You can either create an employee profit-sharing pool or have a bonus for each employee as a percentage of their pay that is paid out quarterly, twice per year, or annually. This allows the management to tie compensation directly to quantitative company, team, and individual performance.

How much of someone’s total compensation should be in the form of performance-based pay? It depends on their role in the organization.

Employee Type

% of Pay Performance Based

Sales Executive

40%

Senior Non-Sales Executive

30%

Director

25%

Manager

20%

Supervisor

15%

Staff-Level

10%

Sales executives usually have the most amount of their compensation in the form of variable pay, as they are the individuals who are most driven by monetary incentives and want their compensation to be representative of their performance.

For SVPs and VPs outside of sales, 30% is a normal percentage for variable pay, going down the scale to 10% at the staff-level, who often want the large majority of their pay to be guaranteed.

The measures that the incentive comp are based on can be set quarterly, semi-annually, or annually. I prefer to set the company and departmental KPIs to which the incentive compensation system is tied twice per year. Every quarter is too often and once per year doesn’t provide enough flexibility to adjust incentives as the business changes.

The employee should be able to overperform on their incentive compensation if they and the company do really well.

The incentive compensation component should be based on both how the company performs and how the individual performs. I’ve found that having 50% of someone’s incentive comp based on company performance and 50% based on individual performance aligns incentives well.

Here’s an example of a compensation plan for a non-sales executive:

Example Non-Sales Executive Compensation Plan

2H 2016 INCENTIVE COMP PLAN FOR EXECUTIVE NAME

Executive had a $40,000 annual bonus for 2016. It will be paid out in 2H 2016 based on the following guidelines:

25% based on the company hitting or beating the Annual Revenue Goal from the 2011 Board Approved Plan

Greater than $XX.XX million in Revenue

25% based on the company hitting or beating the Annual Net Income Goal from the 2010 Board Approved Plan

Greater than $X.XX million in Net Income

10% for each KPI achieved in green for 6 mo. average

+2.5% for each KPI achieved in SuperGreen for 6 month average

If all above metrics hit and all KPIs Supergreen possible payout is 118%

DEPARTMENTAL KPIs

DEFINITION OF GREEN

DEFINITION OF SUPERGREEN (+2.5% Bonus Per KPI)

Departmental KPI 1

2.75-3.5

<2.75

Departmental KPI 2

83-85

80-82.9

Departmental KPI 3

97-99

>99

Departmental KPI 4

99-99.5

>99.5

Departmental KPI 5

65-70

70-80

Incentive compensation for 2H 2016 will be paid out on January 31, 2017.

Agreed:

_______________________________________________ _________________

Executive Date

_______________________________________________ _________________

CEO Date

And here’s an example of a compensation plan for a VP of Sales:

Example VP Sales Compensation Plan

Employee: ____________________________

Title: ____________________________

Annual Variable Comp: $100,000

Quarterly Revenue Goals:50% of variable comp

Q1: $X.XXM

Q2: $X.XXM

Q3: $X.XXM

Q4: $X.XXM

Total: $XX.XXM

Company Goals per KPI Spreadsheet: 50% of variable comp

Company goals per KPI spreadsheet:

2.5% of each metric attained at green level (10 metrics in total)

Estimated for quarterly payment on 1Q & 3Q

Reconciled at actual attainment for 2Q & 4Q payments

Payment Schedule

All variable compensation (except where noted above) will be calculated and paid on a quarterly basis. The amounts will be reviewed and approved by the CFO and CEO prior to payment.

Once you have your incentive compensation plan for each team member, it is time to set up your options plan. Your Board of Directors should approve a pool of shares in your company that you can use for your key team members.

The right size option pool for your company will depend on how much you want to use stock options as part of your compensation mix as well as how much you can pay in cash. If you can pay a market salary, then there’s no need to use stock options widely. If you cannot, they can be of significant use.

Let’s assume you’re a normal high-growth start up and you can only pay salaries that are 50% of what is normal. In this case, here are some guidelines for options in the first four years. This chart is designed for employees, not founders. The ranges are in place based on the amount of experience the individual brings to the table.

Rule of Thumb for Stock Option Percentages

Joined At Start

Joined Year 1

Joined Year 2

Joined Year 3

Joined Year 4+

CFO, CMO, CTO

10%

5%

2.5%

1.5%

1.0%

Vice President

5%

2.5%

1%

.75%

0.50%

Director/Manager

3%

1%

.75%

.35%

0.15%

Engineer

3%

.75%

.50%

.25%

0.10%

Full-time Staff

2%

.5%

.25%

.10%

.05%

It is standard for stock options to vest over four years, meaning that if someone leaves after a year they will only receive 25% of the total amount.

When you provide stock options to employees you usually provide incentive stock options (ISOs) which have certain tax benefits to non-qualified stock options that can be used for contractors and service providers. One downside to ISOs you should know about is that an employee must usually exercise their incentive stock options within 90 days after they are terminated from employment at your firm or lose them.

Even if the options you grant early are at a low price, a cashless tax bill problem can occur when employees later exercise their options as, at least under current U.S. tax law, a person must pay taxes in the year they exercise stock options on the difference between the current fair market value and the original option strike price. This is a really bad tax rule, as it causes people to have to pay taxes on stock that usually cannot yet be sold (due to the company being private)–often forcing the employee to not be able to exercise the options at all. Possible solutions include granting Restricted Stock Units (RSUs) instead of options (and pay the taxes on the compensation that year) or to set up a profit-sharing plan instead of an options plan. RSUs vs. ISOs vs. profit sharing may be too much detail for now, but are important questions to discuss with your corporate attorney when you create your options plan.

Creating a System for Product Management

Product management is the process of defining what you’re building in advance of building it, and then assembling the team and building that product. Product management is a profession employs many people. You might see hundreds of product managers in a company like Google or Microsoft, maybe even thousands.

From my experience as a product manager/CEO at iContact for the first few years, and then here at Connect, I’ve learned that there are two extremes in product development.

There is the controller, the maniacal dictator who says, “This is my vision and nothing else will be taken into consideration as I build this product.” Then there is the “design by committee” approach where there’s no strong leader at all and all the decisions are made in a 10 or 15 or 20-person committee. At that stage, you often get very little innovation as you end up aligning with the lowest common denominator, with no real inspired thinking.

The goal of a great product manager is to be at the right place in the spectrum between those two extremes—between the maniacal, singular, controlled vision and the input from multiple stakeholders. As a product manager, a product developer, you want to be in what I call the green zone where you have strong, focused leadership and strong, focused vision, but you also take the time to incorporate feedback from the right people.

Who are the right people? The right people are the particular examples of customers who may be using your future product, and the select people within your organization who can really contribute to your ability to create a great product. But it’s important to keep those numbers few and keep your leadership and vision strong in order to end up with a truly innovative product.

With product design, you want to be slightly right of center—a little bit closer to the maniacal side. It’s better to have a strong vision and be slightly over-controlling than be completely unsure about the product you’re trying to build and the change you wish to create with it in the world. But you also want to have a little balance.

The next part of product management is understanding that a great product owner must be absolutely passionate. Great product development only happens when the person who is owning that product and seeing it through to reality is absolutely passionate about the change they wish to manifest in the world.

When passion is lacking in products, a company’s sales will go flat. When a CEO, a leader, is no longer passionate (or perhaps was never passionate) about the company’s mission and purpose, the sales results and that company’s profitability and stock price is going to go flat or go down.

To me, the leading indicator of a lack of success as a company is a lack of passion at the top, at the executive levels of a company. If you can build a company where the executives are passionate, and the CEO and board and investors are passionate about the change they’re trying to create, you will see amazing shareholder return if you can combine that passion with execution.

It’s important to define and understand the external personas that you will listen to as you build your product. What is a persona? A persona is an example person that you’re modeling your product development after.

For example, if you’re building an email marketing product like we built at iContact, you would define four or five key personas who might use it. We would often give them names. One of ours was a small business owner who had maybe five or six employees and often tried to do the marketing himself or herself. When you create your personas, you need to understand the demographic and psychographic factors and give them human identities. As you develop your products, you can ask yourself, what would Joe, or Betty, or Bob think about this?

Systems for Building Software

Let’s talk about building great software. I have a lot to learn still about building great software, but I’ve learned some great lessons from building up iContact to 300 employees, and at one point having a 90-person tech team. I found that from my experience, great software is built using a methodology called agile development, in which you’re able to be responsive and reflexive to the customer’s needs and the demands of the marketplace, and you’re able to release updates at least every two months, if not every month or even every two weeks. In some companies, they release every day.

This is a departure from the prior methodology of product development known as waterfall, where you would write a very long product requirements document (PRD) and then take six, nine, or twelve months to come out with a new iteration of the product.

Agile development is also made possible by the Internet, where you can deploy software overnight in just a few minutes instead of having to ship a bunch of CDs.

You also want to make sure that your code is test-driven and has quality assurance built in and automated throughout it. You want to do your programming in something called object-oriented where you create templates and you’re able to make those templates talk to each other rather than creating long scripts that are very complicated to understand or bring new developers and engineers into.

You also want a development team that under-commits and over-delivers and factors in the time it’s going to take for bug tracking, bug fixing, quality assurance, scalability, and security.

Finally, you want to make sure you have clear code that’s easy to understand for new developers that you bring into a project, and standards that any engineer can understand.